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- When consumers spend less, profit slows, forcing businesses to cut costs and take a more defensive stance.
- For some industries, consumers will continue to spend, meaning businesses are not harmed by the recession.
- Investors should look at industries that provide goods and services that people should find good stocks to invest in, regardless of the state of the economy.
When you hear about a pending recession, you immediately conjure up images of people and businesses struggling as the economy slows. These images can even come to you in black and white.
While this is the case, not every business is affected to the same degree. Some companies even thrive during a recession. Here’s a look at why some businesses are hurt during a recession and other industries thrive.
What is a recession?
A recession is a period of economic decline that is usually called when there are two consecutive quarters of negative gross domestic product (GDP) growth. Some experts think that the unemployment rate must rise significantly in addition to negative GDP numbers for it to be a true recession. An inflationary environment often precedes recessions, further slowing consumer spending.
The Business Cycle Meeting Committee of the National Bureau of Economic Research (NBER) is the official body that declares a recession. He defines a recession as “a significant decline in economic activity spread throughout the economy, lasting more than a few months.” The committee has no hard and fast rules for calling a recession, but it does give personal income the most weight.
Why most businesses suffer during a recession
The US economy is based on capitalism, which has simple inputs and outputs. A business opens to provide a good or service and consumers pay for their purchases with their budgeted or free income. The business makes a profit on every sale, while the consumer gets something that meets their needs or wants. As the business grows, it hires and pays employees who then continue to spend their income. These workers are also consumers, and consumer spending drives the American economy.
Businesses can expect steady sales and profits during a normal economy where inflation is minimal and people have a reliable income. Inflation disrupts this balance by causing prices to rise and reducing the spending power of the average consumer.
For example, a consumer spends $75 per week on groceries, with an average cost of $3 per item. The customer comes home with 25 items. Inflation causes the average price of an item to rise to $5, resulting in the consumer bringing home 15 items. There are 10 items left on the shelf – items that would have sold during a normal economy. In short, a recession disrupts the reliability of earnings for a business.
The retailer must decide to keep their price at the current level to maintain profitability or put the items on sale and make less profit in order to move their inventory to avoid a total loss in those items.
Different types of businesses that thrive during a recession
People need certain types of services to support their daily lives. Life becomes more difficult without them, and some aspects of society would literally break down without them. Below is a look at some of the services that have not been significantly affected by a recessionary environment.
Caring for children
Day care will always be in demand as long as parents need someone to care for their children while they work. This is true for both single-income and dual-income families.
The only investment option for a stock purely focused on childcare is Bright Horizons Family Solutions. They operate childcare and early education centers in the US, Canada and Europe. Since it is the only publicly traded stock in the industry, it is difficult to value based on its peers. However, finances are strong and the company plans to expand in the coming years.
The repair services category covers everything from cars to major household appliances. When something breaks, it must be repaired. People repair items to save money and extend the life of their possessions.
As a result, repair services are always in demand, along with qualified technicians. In fact, the demand for repair services increases during a recession due to consumers choosing to repair rather than replace when money is tight.
Most repair services are small, local businesses. Very few are large, publicly traded companies. But that doesn’t mean there aren’t stocks to invest in, you just have to think a little outside the box.
For example, you can invest in Home Depot or Lowes to take advantage of people renovating and updating their homes. Many consumers go the DIY route as opposed to buying a new home during a recession.
Also, you can consider advanced auto parts, as people repair their vehicles instead of buying new ones.
Death is an unfortunate fact of life and funeral homes are an indispensable supplier. Funeral costs have risen as environmental laws make burial more expensive. As a result, more people are getting burned.
While many funeral homes are private companies, some operators are publicly traded. One of the best is Services Corporation International. They provide death care services, including cremations, funerals and cemeteries. While the S&P 500 is down roughly 20% for the year, this stock is flat.
Some other stocks in this industry include AlderwoodsGroup, Carriage Services and Stewart Enterprises.
Garbage haulers take every day, people and businesses will sacrifice in other areas of their lives before going without their trash. This industry is recession proof.
Waste Management and Republic Services are two haulers that handle removal for residential, business and municipal customers, helping the company spread its risk compared to those that only serve residential customers.
Republic Services operates nationally and is the second largest waste collector in the US. It has a history of consistent earnings and a positive outlook for future earnings.
Cigarettes and Alcohol
While people will cut back on discretionary spending during a recession, they typically won’t cut back on vices like cigarettes and alcohol. In the case of cigarettes, buyers are addicted to nicotine, they will first cut spending in other areas.
The same goes for alcohol. While consumption may decrease slightly, it will not drop significantly, let alone dry up.
Altria is a cigarette company that has had its ups and downs recently, but it’s still a solid stock that pays a strong dividend. The biggest challenge facing Altria is government regulation of cigarettes and e-cigarettes, something that negatively impacted Altria with its planned acquisition of Juul Labs.
If you’re looking for an alcohol backup, Constellation Brands makes beer, wine and spirits. Some of its brands include Corona, Wild Horse Winery and Svedka Vodka. The company has strong finances and will benefit in a strong or weak economy.
If you’re an investor looking to make money during a recession, or at least limit your losses, check out the industries people can’t live without, no matter how the economy is doing.
If you need help determining where to invest, you can save time by using an investment kit from Q.ai. These themed kits are designed to take the guesswork out of investing. Some topics include Inflation Protection, Vault of Value, and Guilty Pleasures. You can even choose portfolio protection to further limit downside risk.
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